Brexit: The Trade-Offs

The United Kingdom’s (“UK”) 2016 “leave” vote on Brexit was a significant disruption to the status quo. Both the Conservative and Labour parties underwent major leadership changes.[1] Conservative Prime Minister David Cameron resigned[2], and Labour’s leader, Jeremy Corbyn, continues to struggle to maintain party control following his unenthusiastic support of the “remain” campaign.[3] Immediately following the “leave” vote, stock markets tumbled worldwide and the British Pound took a beating.[4] The New York Times took a somewhat dramatic tone when it stated that the Brexit vote “is already threatening to unravel a democratic bloc of nations that has coexisted peacefully together for decades.”[5] At the core of the debate on whether to leave or remain in the European Union (“EU”) were two issues: trade and immigration.[6]

Focusing on trade, much of the criticism leveled at supporters of Brexit characterized them as “little Englanders” who are “happier to retreat into an insular core of mercantile self-interest.”[7] However, this gross mischaracterization misses a key point: being in the EU prohibits the UK from negotiating trade deals unilaterally with other nations, such as between the UK and the United States, where potential gains are enormous.[8] Remaining in the EU would have assured the UK of access to continental markets, but at the same time, staying in the EU would have subjected the UK to vast amounts of regulation from the EU bureaucracy. Today, more law in the UK comes from Brussels than London.[9]

In order to gain access to the EU, the UK had to accept the power of the EU to block any trade deals that Britain could make with other nations. Brexit is expected to return authority to the UK to set its own external tariffs and its trade policy more broadly, a competence that currently resides with the EU for all EU member states. Article 50 of the Treaty on European Union sets a two-year period for exit negotiations[10], although some close to the situation believe it will take longer.[11] On March 29, 2017, Prime Minister May sent a letter to the President of the European Council, Donald Tusk, triggering Article 50.[12] In the letter, Prime Minister May expressed her desire to conduct negotiations about future EU-UK relationships contemporaneously with withdrawal negotiations.[13] However, the EU issued a statement announcing that the withdrawal negotiations must be concluded before any negotiations over future trade relations can begin.[14]

If all goes well, the UK could enter into a free trade agreement with the EU. In a January 17, 2017 speech, Prime Minister May confirmed that the UK is not seeking membership in the EU Single Market, but rather the negotiation of free trade agreement with the EU to allow “the freest possible trade in goods and services between Britain and the EU’s member states.”[15] Meanwhile, in what may be a lengthy negotiation with the EU of its terms of withdrawal, the UK remains an EU member and the EU continues to have exclusive competence over the UK’s trade policy as it does for other EU member states.[16]

The status of UK trade relations with the United States and other powerful economies depends, to a large degree, on UK-EU trade relations going forward, as non-EU businesses that currently trade and invest with the UK benefit from the UK’s access to the Single Market. For example, non-EU companies in the UK can utilize “passporting rights,” whereby they can incorporate in one EU member state (e.g., the UK), and conduct business in other member states without having to obtain authorization in each individual member state.[17] Potential loss of UK access to the EU Single Market could increase tariffs for U.S. and other foreign businesses that export from the UK to other parts of the EU. Therefore, future UK-EU trade relations will determine what positions the UK will be able to take in bilateral negotiations with the U.S. and other foreign nations.

Although initially it appeared as if the UK would be unable to negotiate a trade deal with the U.S., it looks as if President Trump has reversed President Obama’s promise to put the UK at the back of the line for any trade deal.[18] In fact, President Trump has stated his intention to negotiate a U.S.-UK free trade agreement “quickly” that is “[g]ood for both sides.[19] These are welcome positive developments, from a campaign marred by fear-mongering, that may end up being beneficial from a trade standpoint.

[8] U.S. Census Bureau, Trade in Goods with United Kingdom, https://www.census.gov/foreign-trade/balance/c4120.html (in 2016, the U.K. exported $54.27 billion worth of goods to the U.S. and imported $55.28 billion worth of goods from the U.S.).

[9] Clive Coleman, Reality Check: How Much UK Law Comes From the EU?, BBC (June 8, 2016), http://www.bbc.com/news/uk-politics-eu-referendum-36473105 (“[A]bout 62% of laws introduced between 1993 and 2014 that apply in the UK implemented EU obligations.”).

[10] Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community art. 50 (Dec. 13, 2007) http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=OJ:C:2016:202:FULL&from=EN.

[11]Brexit Talks Will Take Longer Than Two Years, Says Jean-Claude Juncker, The Telegraph (Febr. 17, 2017), http://www.telegraph.co.uk/news/2017/02/17/brexit-talks-will-take-longer-two-years-says-jean-claudejuncker/.

[17] HM Government, Review of the Balance of Competences Between the United King and the European Union, The Single Market: Financial Services and the Movement of Capital, HL Paper 150, at 30 (Febr., 2014), https://publications.parliament.uk/pa/ld201415/ldselect/ldeucom/140/140.pdf.